1. Computation of book profits by Ind AS compliant companies for levy of MAT Customer Care No. 91-11-45562222 www.taxmann.com

2. 1) Introduction The provisions of Section 115JB provide for levy of MAT on basis of "book profits", i.e., the profit disclosed in profit and loss account prepared in accordance with provisions of The Companies Act. Ind AS compliant companies shall be required to bifurcate their Profit or Loss account into following two parts - (i) Net profit or loss for the year; (ii) Net Other Comprehensive Income. Now question arises whether 'Net other comprehensive income' should be considered for computation of book profit under Section 115JB? On June 8, 2015, the CBDT had constituted a committee to, inter alia, suggest the framework for computation of book profit for the purpose of levy of MAT on the Ind AS compliant companies in the year of adoption and thereafter. Now the committee has submitted its report after having consultation with MCA. Recommendations of committee and other related terms have been discussed in this article in the form of Q&As. 2 Customer Care No. 91-11-45562222 www.taxmann.com

3. 2) What is IND-AS India has adopted the IFRS converged IND-AS with a view to enhance the acceptability and transparency for the financial statements of Indian corporates. These IND-AS can be applied voluntarily in preparation of financial statements from April 1, 2015 and have to be applied mandatorily from April 1, 2016 by certain entities. 3) Format of Financial Statements With adoption of IND-AS, the format of financial statements shall undergo various changes which can be either change in the nomenclature of any item or their accounting treatment. One of themajor changes that shall happen in the format of financial statements after adoption of IND-AS includeseparate disclosure of "other comprehensive income" in the Statement of profit or loss. 4) What is 'Other Comprehensive Income' The IND-AS promotes the concept of Fair Value Accounting where assets shall be valued at fair value.'Other comprehensive income'includes, inter-alia, the financial impact arising from reinstatement of underlying assets in accordance with principle of Fair Value Accounting. 3 Customer Care No. 91-11-45562222 www.taxmann.com

4. To avoid the distribution of the revaluation profits to the shareholders by way of dividend or to the managers as managerial remuneration, the net profits are adjusted with 'Net OCIs'. OCIs include the following items, which shall be excluded for the purpose of arriving at distributable profits: (a) Changes in revaluation surplus; (b) Re-measurements of defined benefit plans; (c) Gains and losses arising from translating the financial statements of a foreign operation; (d) Gains and losses from investments in equity instruments designated at fair value; (e) Gains and losses on financial assets measured at fair value; (f) The effective portion of gains and losses on hedging instruments in a cash flow hedge and the gains and losses on hedging instruments that hedge investments in equity instruments measured at fair value; (g) For particular liabilities designated as at fair value through profit or loss, the amount of the change in fair value that is attributable to changes in the liability's credit risk; 4 www.taxmann.com Customer Care No. 91-11-45562222

5. (h) Changes in the value of the time value of options when separating the intrinsic value and time value of an option contract and designating as the hedging instrument only the changes in the intrinsic value; (i) Changes in the value of the forward elements of forward contracts when separating the forward elements and spot elements of a forward contract and designating as the hedging instrument only the changes in the spot element, and changes in the value of the foreign currency basis spread of a financial instrument when excluding it from the designation of that financial instrument as the hedging instrument. Due to the concept of OCIs two profits arise - Profit before tax and before OCIs adjustment and Profit before tax but after OCIs adjustment. 6) Why Net OCIs are excluded The 'Lohia Committee' constituted on MAT and IND-AS has recommended that no further adjustments are required to be made to the net profits (excluding net other comprehensive income) of IND-AS compliant companies other than those already specified under Section 115JB. In other words, the committee recommends that since the distributable profits (available for distribution of dividend or managerial remuneration) exclude net comprehensive income, it should also be excluded from the book profit for computation of MAT. 5 Customer Care No. 91-11-45562222 www.taxmann.com

6. 7) Are Net OCIs always excluded from Book Profit ? Net OCIs are the outcome of reinstatement of specified assets (immovable property, figures appearing in financial statements of foreign subsidiaries, etc.) at their fair value or other adjustments. These Net OCIs are capable of reversal in subsequent period and, on reversal, reclassified into profit & loss account. Thus, Net OCIs are proposed to be excluded from the calculation of Book Profit till these items are not reclassified into profit & loss account. However, the committee recommended adjustment for following items of Net OCIs which are permanently recorded in reserves and are never reclassified into the Statement of Profit and Loss: (a) Changes in Revaluation Surplus(IND-AS 16 and IND-AS 38) as it is currently included in book profits at the time of realization/ disposal/ retirement of Asset. (b) Re-measurement of Defined Benefit Plan(IND-AS 19), which should be included in the Book profits on annual basis when the gains or losses arise. (c) Gains and losses from investments in equity instruments designated at fair value (IND-AS 109), which should be included in book profits at the time of realization. 6 Customer Care No. 91-11-45562222 www.taxmann.com

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